Economic Logic and Mike Gallagher

This evening as I was coming back from the airport I listened to Mike Gallagher, who by my estimation is the Rodney Dangerfield of talk show hosts. (He is the sixth most popular talk show host - or so he claims). As noted earlier, I have grown tired of talk show hosts and here is an example of why.

Gallagher did a discussion of helmet laws and iPhone pricing. He described Apple's decision to reduce its prices on its iPhone as a ripoff or a scam. (Although he also said it was the best product of this type he has seen - here he is right). Gallagher does not list where he went to college or that he ever studied economic. There are two flaws in his "logic." First, the early adopter's issue. He (and I) bought the iPhone in the first sixty days of its offering and then Apple reduced the price by $200 - thereby cutting their margins. But those of us who bought the phone early got two things of economic value - which we could have chosen to forgo. The first was techno bragging rights. Those of us who bought the phone early got between 2 and 60 days of being able to have people go WOW to our purchase of a wonderful new device. I bought mine on June 30 - so I got all of the months of July and August and some of September - assuming that is worth about $3 per day - the $200 premium is clearly worth it. But wait, we get $100 back from Apple for being an early adopter (as noted in an earlier post - the better choice for Apple would have been to allow us frontliners to stay there as the next generation phone comes out). So in essence the cost of being an early adopter was less than a Venti non-fat hot chocolate per day. That seems cheap.

Gallagher seems to argue that there is a single clearing market price for goods. That is not true for many products unless you add the element of time. When the next generation of iPhones comes out would he argue that the current version, with presumably fewer features, be priced at the same level? Of course not.

As noted in an earlier post, some "marketing" experts argued that Apple's pricing was too expensive and that their market was very small. Those prognosticators, based on the first two months of sales, seem to be quite foolish. As almost every reviewer has commented this device has features that no other device of its kind has. Presumably, as a shareholder of Apple (and I am) I would want the company to maximize profits in my behalf. As a consumer (and I am) I would want the price to be as inexpensive as possible.

In my mind there is a second issue, for the small percentage of early adopters who bought the 4 gig phone. I assume they also get the $100 but their product is discontinued (giving strong support to the notion that the early adopters bought the most powerful device available and were thus less interested in the clearing price of the phone). For the rest of us, we got the larger model for what it cost the early adopters to get the discontinued model.

Gallagher makes a pretty good point - i.e. that government regulation of prices is not a good idea (he extended the analogy to laws that require helmets for motorcycle riders). Yet, somehow he seems to think that a pricing change early in a product cycle is somehow a scam. That is nonsense. Early adopters pay a premium. But if he understood the dynamics of Moore's Law he would understand that the inevitable process of prices in technology is in a downward direction.

In the tech world there is a second issue - that being that prices reduce as the technology advances. One could make a very good argument that the price reduction in the iPhone price actually protects our initial investment - especially, if as some of the blogs suggest, a 3G model will be available by yearend.

Apple's goal throughout the product cycle should be to maximize profits not to set a single optimal price. That is an important concept that Gallagher seems to fail to grasp.